The Disadvantages of Shortening Amortization Mortgages

Saving money with a shorter amortization mortgage has a cost.

Certain financial advisers state that shortening mortgage amortizations provides an excellent way in which to save money and get out of debt. Going from a 30-year mortgage to a 15-year mortgage will save you a great deal of money, as well as get you out of debt 15 years faster. On the other hand, shorter amortization periods have drawbacks, too.

Higher Payments

The biggest challenge that comes with shortening your amortization period is that it makes the payments go up even though a shorter amortization mortgage usually has a lower rate. For instance, a $250,000 30-year mortgage at 3.43 percent carries a $1,112.87 monthly payment for principal and interest. A 15-year mortgage for $250,000 at 2.84 percent has a $1,707.28 monthly payment. While going with the 15-year loan will save you $93,321 over its life, it will also cost you 53 percent more -- almost $600.00 -- every month.

Lost Investment Potential

Spending more on your mortgage means that you have less to invest every month. Using the above example, if you went from a 15-year to a 30-year mortgage, you would free up $594.42 a month. If you could invest that sum and earn 8 percent, which is below the historical rate of return for the stock market, you would end up with $205,692 in your account after 15 years. This would be enough to pay off your remaining $156,421.28 mortgage balance and leave you with $49,270.76 in your pocket. Because the 30-year loan costs more, you also would have had had more tax write-offs along the way.

Lifestyle Limitations

Having a higher payment an impact your lifestyle. For most people, mortgage payments are their most expensive monthly obligation. When you owe more every month, you have less flexibility in how you can spend your money. This can prevent you from doing things like buying a new car, cutting back your hours to care for a family member, or changing to a less lucrative but more fulfilling career.

Increased Default Risk

Having higher payments does more than cramp your lifestyle. It also increases the risk that you will default on your mortgage. Using the above example, $6,678.20, which is a six-month reserve for the 30-year mortgage, would not even be enough to make four payments on the 15-year mortgage. In other words, if things go wrong for you financially, you will get into trouble sooner with a more expensive shorter amortization mortgage.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.